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GS Paper: GS3

  • Dividend Distribution Tax (DDT)

     

    Finance Minister announced abolition of DDT to be paid by companies in her budget speech.

    What is DDT?

    • A dividend is a return given by a company to its shareholders out of the profits earned by the company in a particular year.
    • Dividend constitutes income in the hands of the shareholders which ideally should be subject to income tax.
    • However, the income tax laws in India provide for an exemption of the dividend income received from Indian companies by the investors by levying a tax called the DDT on the company paying the dividend.

    Who were required paid DDT?

    • Any domestic company which is declaring/distributing dividend is required to pay DDT at the rate of 15% on the gross amount of dividend as mandated under Section 115O of the Income Tax Act.
    • DDT was also applicable on mutual funds.

    Why it is scrapped?

    • Every MNE investing in India is faced with the question of tax-efficient repatriation of profits that accumulate here.
    • The dividend that the holding company would receive would have already suffered substantial tax in India, although indirectly.
    • The foreign company would normally be required to pay tax on the dividend so received in its home jurisdiction.
    • DDT being a tax in the Indian company and the foreign company not paying taxes directly on such dividend income in India, it would not be able to claim foreign tax credit in its home jurisdiction.
    • This resulted in a double whammy for foreign companies as, at a group level, they suffered double taxation.

  • [op ed of the day] Stay with stimulus

    Context

    The stimulus needs to continue and the reforms will help to keep the economy going. If gross savings and investment rates keep on falling it is difficult to revive the economy.

    What was expected in the last budget?

    • Increase in pubic investment: The first thing, it said, was to increase public investment and not play statistical or token announcement games.
    • The upswing in manufacturing growth, from negative to slightly less than 3 per cent (not industrial growth, because that includes mining and electricity), needed consolidation.
    • Real outlays in infra did not go up: Real outlays on the infrastructure needed to go up, but they did not.
      • So the push to private demand and a virtuous cycle of growth was missed.
      • The implicit numbers in the Budget math comprise growth of around 7 per cent, assuming a 5 per cent inflation rate.

    Prospects of the Agri-sector

    • A good sign in Agri in midterm: For agriculture, in the medium-term, we are alright. Kharif grain production was 6.4 per cent higher than the previous five-year average output.
      • Kharif oilseeds output around eleven lakh tonnes above the earlier year.
      • This was, however, based on a delayed monsoon which caused problems and anxieties in the second quarter of this year.
    • Nightmare of government unloading grain in the market: Foodgrains are doing well and we have huge food stocks.
      • But, instead of a blessing, the government turned public operations in grain into a nightmare by announcing that FCI will unload grain at a reserve price less than MSP.
      • Rabi acreage recovered and is now 8 per cent more than last year, but the policy of government operations to reduce the market price of grain by its intervention is a nightmare.
    • This is bound to affect input growth in the expanded acreage in the winter crops.

    Wrong policy in Agriculture

    • Terms of trade against agriculture: The terms of trade are going against agriculture, according to CACP (Commission for Agricultural Costs & Prices) estimates, and selling of the grain will make it worse.
    • While the fundamentals are alright, to wallop the farmer with a “cut in the reserve price” would harm the farmers.
    • The rabi report of CACP will say that the terms of trade have gone down more.

    Conclusion

    The Government should continue with the stimulus and opt for the reforms in the economy only to keep the economy going. If the gross savings and investment rates keep falling it would be difficult to revive the economy. If savings keep up, the government will have actual space to divert some real resources to infrastructure investment.

     

     

     

     

  • [op-ed snap] Cybersecurity a critical challenge for India’s digital payments ecosys

    Context

    Digital payments in India are witnessing consistent growth at a compound annual growth rate (CAGR) of 12.7%.

    Growth potential and challenges involved in digital payments

    • Expected growth in mobile wallet payment: The mobile wallet market is expected to continuously grow at a CAGR of 52.2% by volume between 2019-23, according to a recent report by KPMG.
      • This digital explosion can be seen in the accelerating rise in the download and use of electronic wallets as well as an unprecedented increase in digital transactions/payments.
      • UPI/IMPS use growth: Payment systems such as UPI/IMPS are likely to register average annualised growth of over 100%, according to RBI’s 2021 vision document.
    • Challenge of Cybersecurity: Cybersecurity is one of the most critical challenges faced by stakeholders of the digital payment ecosystem.
      • Types of risks involved: With more and more users preferring digital payments, the chances of getting exposed to cybersecurity risks such as-
      • Online fraud
      • Information theft.
      • Malware or virus attacks are also increasing.
      • Digital payment frauds account for about half of all bank frauds in India.

    Steps taken by the RBI

    • Guidelines issued: In view of risks, the Reserve Bank of India (RBI) has also issued some guidelines as security and risk mitigation measures for digital payments.
      • It has also issued guidelines that limit the liability of customers on unauthorised electronic banking transactions
    • Steps taken: The central bank has taken steps for securing card transactions, internet banking, electronic payments, ATM transactions, and prepaid payment instruments (PPIs).

    Securing the fintech revolution

    • Fraudsters building advanced technologies: The changing nature of cybersecurity attacks such as-
      • Web application attack.
      • Ransomware.
      • Reconnaissance.
      • The DDoS attack clearly establishes cyber-risk as a new reality.
    • What needs to be done to secure the fintech revolution?
      • A robust regulatory framework.
      • An effective customer redressal framework.
      • Foolproof security measures to enable confidence and trust.
      • Incentives for larger participation and benefits similar to cash transactions- are some measures that can help ensure long-term success for digital payments.
    • Leveraging technology: Technology can be leveraged for making popular methods of cashless payments secure.
      • Biometric authentication-enabled cards can provide a greater layer of security by enabling replacement of the traditional PIN.
      • Through biometric authentication, consumers can authenticate transactions by placing their finger on a fingerprint sensor embedded in the card.
      • Ensuring security: Safety is ensured as the consumer’s fingerprint is stored only in the secure chip within the card and the same chip is used to match the scanned fingerprint with the stored one.
      • The biggest advantage: The biggest advantage is that the bank or merchant cannot access the consumer’s biometric data, which also counters potential privacy concerns.

    Conclusion

    To reap the advantages of the promising fintech revolution steps must be taken to secure the digital environment.

     

     

     

  • Explained: Fiscal Responsibility and Budget Management (FRBM) Act

    Context

    • As the years have rolled by, fiscal deficit has become a key factor to watch out for in every Budget presentation.
    • It is considered the most important marker of a government’s financial health.
    • A government that abides by the FRBM rules enjoys greater credibility among the rating agencies and market participants – both national and international.

    FRBM Act

    • The FRBM is an act of the parliament that set targets for the Government of India to establish financial discipline, improve the management of public funds, strengthen fiscal prudence and reduce its fiscal deficits.
    • It was first introduced in the parliament of India in the year 2000 by Vajpayee Government for providing legal backing to the fiscal discipline to be institutionalized in the country.
    • Subsequently, the FRBM Act was passed in the year 2003.

    Features of the FRBM Act

    • It was mandated by the act that the following must be placed along with the Budget documents annually in the Parliament:
    1. Macroeconomic Framework Statement
    2. Medium Term Fiscal Policy Statement and
    3. Fiscal Policy Strategy Statement

    Fiscal Indicators

    It was proposed that the four fiscal indicators be projected in the medium-term fiscal policy statement viz.

    1. Revenue deficit as a percentage of GDP,
    2. Fiscal deficit as a percentage of GDP,
    3. Tax revenue as a percentage of GDP and
    4. Total outstanding liabilities as a percentage of GDP

    Why FRBM is back in debate?

    • Not letting the fiscal deficit go completely out of control has been one of the standout achievements of the incumbent NDA government.
    • However, as India’s economic growth has decelerated, there have been growing pressures on the government to breach the FRBM orthodoxy and spend in excess of fiscal deficit targets to reboot domestic growth.
    • Others, however, continue to caution that the “real” fiscal deficit is already far more than the official number, and as such, there is no room for further increasing the expenditure by the government.

    Which of these narratives is true?

    • Actually, neither. But to understand that one has to first understand what are the different types of deficits and why does it matter to limit them.

    Different types of deficits

    • Fiscal is the excess of what the amount the government plans to spend over what the government expects to receive.
    • Obviously, to make up this gap, the government has to borrow money from the market.But all government expenditure is not of the same kind.
    • For instance, if the expenditure is for paying salaries then it is counted as “revenue” expenditure but if it goes into building a road or a factory – that is, something that in turn increases the economy’s capacity to produce more – then it is characterized as “capital” expenditure.
    • The fiscal deficit is another key marker and it maps the excess of revenue expenditure over revenue receipts.
    • The difference between fiscal deficit and revenue deficit is the government’s capital expenditure.

    What FRBM says on deficits?

    • As a broad rule, it is considered fiscally imprudent for a government to borrow money for “revenue” purposes.
    • As a result, the FRBM Act of 2003 had mandated that, apart from limiting the fiscal deficit to 3% of the nominal GDP, the revenue deficit should be brought down to 0%.
    • This would have meant that all the government borrowing (or fiscal deficit) for the year would have funded only capital expenditure by the government.

    Why prefer capital expenditure over revenue expenditure?

    • In any economy, when the government spends money or cuts taxes it has an impact on the economic activity of the country.
    • But this impact (also called the “Multiplier” effect) is quite different for revenue expenditure and capital expenditure.
    • In other words, when the government spends Rs 100 on increasing salaries in India, the economy grows by a little less than Rs 100.
    • But, when the government uses that money to make a road or a bridge, the economy’s GDP grows by Rs 250.
    • The question then is: How to get governments to switch from revenue expenditure to capital expenditure? That’s where the FRBM Act comes in handy.

    What is the significance of an FRBM Act?

    • The popular understanding of the FRBM Act is that it is meant to “compress” or restrict government expenditure. But that is a flawed understanding.
    • The truth is that FRBM Act is not an expenditure compressing mechanism, rather an expenditure switching one.
    • In other words, the FRBM Act – by limiting the total fiscal deficit (to 3% of nominal GDP) and asking for revenue deficit to be eliminated altogether – is helping the governments to switch their expenditure from revenue to capital.
    • This also means that – again, contrary to popular understanding – adhering to the FRBM Act should not reduce India’s GDP, rather increase it.

    Here’s how: When you cut on revenue deficit – that is, reduce your borrowings for funding revenue expenditure – and instead borrow to only spend on building capital, you increase the overall GDP by 2.5 times the amount of money borrowed. So adhering to FRBM Act is a win-win.

    What has been India’s record on adhering to FRBM Act?

    • Between 2004 and 2008, the Indian government had made giant strides on reducing both revenue deficit and fiscal deficit.
    • But this process was reversed thereafter thanks largely to the Global Financial Crisis and a domestic slowdown.
    • Since then, there have been several amendments to the Act essentially postponing the targets.
    • But the worst development happened in 2018 when the Union government stopped targeting revenue deficit and instead focussed only on fiscal deficit.

    Way Forward

    • There is a need to revert back to the original FRBM Act if 2003 by recognising and prioritizing the reduction in revenue deficit.
    • Doing this will help the government boost the kind of expenditure that actually increases the GDP.

  • Economic Survey & its significance

    With the Indian economy in the doldrums, this year’s Economic Survey will be keenly watched. The Economic Survey for 2019-2020 will be tabled in Parliament today.

    What is the Economic Survey?

    • The Economic Survey is a report the government presents on the state of the economy in the past one year, the key challenges it anticipates, and their possible solutions.
    • One day before the Union budget, the Chief Economic Adviser (CEA) of the country releases the Economic Survey.
    • The document is prepared by the Economic Division of the Department of Economic Affairs (DEA) under the guidance of the CEA.
    • Once prepared, the Survey is approved by the Finance Minister.
    • The first Economic Survey was presented in 1950-51. Until 1964, the document would be presented along with the Budget.
    • For the past few years, the Economic Survey has been presented in two volumes.
    • For example, in 2018-19, while Volume 1 focussed on research and analysis of the challenges facing the Indian economy, Volume 2 gave a more detailed review of the financial year, covering all the major sectors of the economy.

    Why is the Economic Survey significant?

    • The Economic Survey is a crucial document as it provides a detailed, official version of the government’s take on the country’s economic condition.
    • It can also be used to highlight some key concerns or areas of focus — for example, in 2018, the survey presented by the then CEA Arvind Subramanian was pink in colour, to stress on gender equality.

    Is it binding on the government?

    • The government is not constitutionally bound to present the Economic Survey or to follow the recommendations that are made in it.
    • If the government so chooses, it can reject all suggestions laid out in the document.
    • But while the Centre is not obliged to present the Survey at all, it is tabled because of the significance it holds.

    What are the expectations from Economic Survey 2020?

    • At a time when India’s growth has plummeted to a six-year low, the Economic Survey ahead of the Union Budget is expected to offer key insights into the path ahead for the government to revive growth.
    • The conundrum of remaining fixated on deficit targets or making a concerted push towards more expenditure to kickstart growth is one of the key challenges the government is facing.
    • The Survey is expected to shed light on the crucial gaps that the Budget will aim to fill in terms of unemployment, private investment, and a slump in consumption.

  • IMO Sulphur regulations for Shipping

    The International Maritime Organization (IMO), the shipping agency of the United Nations issued new rules aiming to reduce sulphur emissions, due to which ships are opting for newer blends of fuels.

    What do the new IMO rules say?

    • The IMO has banned ships from using fuels with sulphur content above 0.5 per cent, compared with 3.5 per cent previously.
    • Sulphur oxides (SOx), which are formed after combustion in engines, are known to cause respiratory symptoms and lung disease, while also leading to acid rain.
    • The new regulations, called IMO 2020, have been regarded as the biggest shake up for the oil and shipping industries in decades. It affects more than 50,000 merchant ships worldwide.
    • The new limits are monitored and enforced by national authorities of countries that are members of the International Convention for the Prevention of Pollution from Ships (MARPOL) Annex VI.

    Cleaner options

    • Under the new policy, only ships fitted with sulphur-cleaning devices, known as scrubbers, are allowed to continue burning high-sulphur fuel.
    • Alternatively, Ships can opt for cleaner fuels, such as marine gasoil (MGO) and very low-sulfur fuel oil (VLSFO).
    • Of the two cleaner fuels, ship-owners were expected to opt for MGO, which is made exclusively from distillates, and has low sulphur content.
    • However, many are reportedly choosing VLSFO, which has better calorific properties and other technical advantages.

    Issues with the rule

    • There are complaints against VLSFO as well, as testing companies have claimed that high sediment formation due to the fuel’s use could damage vessel engines.
    • VLSFO, with 0.5 per cent sulphur content, can contain a large percentage of aromatic compounds, thus having a direct impact on black carbon emissions.
    • Black carbon, which is produced due to the incomplete combustion of carbon-based fuels, contributes to climate change.

  • Plantation Corporation of India

    The Union government is likely to announce the setting up of a Plantation Corporation of India in the upcoming budget.

    Plantation Corporation of India

    • The PCI will subsume all afforestation-related schemes currently underway in India including the Green India Mission, National Afforestation Programme and compensatory afforestation.
    • The corporation will use Compensatory Afforestation Fund (CAF) money to undertake the plantations and investment will also come from the global pension fund.
    • CAF is a huge corpus of money collected from projects proponents for diverting forest land to be used for non-forestry activity.

    Issues with PCI

    • Critics have raised concerns over the move’s impact on the federal structure of forest governance in the country.
    • While forests are a concurrent subject, land-related issues are the responsibility of the states.

  • [pib] Exercise SAMPRITI-IX

    As part of the ongoing Indo-Bangladesh defence cooperation, a joint military training exercise SAMPRITI-IX is being conducted in Meghalaya.

    Exercise SAMPRITI

    • It is an important bilateral defence cooperation endeavour between India and Bangladesh and will be the ninth edition of the exercise which is hosted alternately by both countries.
    • During the joint military exercise SAMPRITI-IX, a Command Post Exercise (CPX) and a Field Training Exercise (FTX) will be conducted.
    • For both the CPX and FTX, a scenario where both nations are working together in a Counter-Terrorism environment will be simulated under the UN Charter.
    • The FTX curriculum is progressively planned where the participants will initially get familiar with each other’s organizational structure and tactical drills.
    • The training will culminate with a final validation exercise in which troops of both armies will jointly practice a Counter Terrorist Operation in a controlled and simulated environment.

  • India’s first ‘fruit train’

     

    A ‘fruit train’, said to be the first of its kind in India, was flagged off from Tadipatri Railway Station in Anantapur district of Andhra.

    About the fruit train

    • This is the first time in India that an entire train is being sent to the gateway port (JNPT) for export.
    • This helps save both time and fuel as 150 trucks would have been required to send a consignment of this size by road to JNPT, which is over 900 km away, before the temperature-controlled containers are loaded on ships.
    • The bananas are being exported under the brand name ‘Happy Bananas’.
    • Farmers from Putlur region in Anantapur and Pulivendula in Kadapa district are exporting ‘Green Cavendish’ bananas to many international markets.

  •  [op-ed snap] Don’t be deterred by the ‘crowding out’ effect of the fisc

    Context

    Market borrowings of the government do not always squeeze credit for the private sector in India.

    What is ‘crowding out’ effect?

    • Increased government spending and borrowing: It refers to how increased government spending, for which it borrows more money, tends to reduce private spending.
      • Why does private spending reduce? This happens because when the government takes up the lion’s share of funds available in the banking system, less of it is left for private borrowers.
      • Relationship with interest rate: Higher borrowing by the government and subsequent crowding out also impacts interest rates in the economy.

    How the Government borrowing works and the role of RBI

    • Local borrowing local spending: Typically, the government funds its fiscal deficit by borrowing from the domestic bond market.
      • Its expenditure is also local in nature.
    • Overdraft from RBI: The Reserve Bank of India (RBI) is the official banker to the government-which spends money by first taking an overdraft from the central bank.
      • This overdraft gets repaid through bond market borrowings.
    • Why overdraft? The understanding is that any such government spending should ideally not affect the availability of funds to other borrowers in the market.
    • Excessive borrowing and effects on the interest rate: Excessive government borrowing from the bond market, many cautions, could lead to a rise in interest rates for the government itself and consequently for everyone else in the economy.

    Analysis of the effects of borrowing on other variables

    • Analysis of the data reveals the following trends.
    • No impact on other variables: Local borrowing and spending by the Indian government does not impact any other macroeconomic variables like-
      • The availability and cost of funds for other participants in the economy.
      • Inflation.
      • Deposit growth, at the current deficit level—that is, with the state and central combined figure above 6% of GDP.
    • What impacts the interest rate the most?
      • The two most important variables that impacted interest rates were inflation and the repo rate. Which tend to move together.
      • What does it indicate? This clearly indicates that RBI is extremely proactive in the way it manages interest rates.
    • Effects of funds on inflation: Such borrowings that are funded by the central bank could lead to inflation, the same is true for large external inflows to domestic money markets.
      • The foreign borrowings finally get reflected in the country’s foreign exchange reserves, which have a very strong relationship with inflation.
      • Effects on interest rates: Technically, any large inflow of a foreign currency sterilized by RBI does have the potential to move the inflation needle up, thus placing upward pressure on interest rates.
    • Relationship between borrowing and growth: It is clear that government borrowing and spending actually drives GDP growth.
      • Government borrowing should not impact bank lending to companies, as the sums borrowed return to the market almost immediately.
    • How RBI controls bond yield?
      • RBI ensures that bond yields don’t shoot up because of the excessive borrowing, by taking bonds onto its books to be released back into the market in good times.

    The uniqueness of the Indian money market

    • Why is it unique? India market is a unique money market, different from the rest of the world, for the following reasons-
      • We have investors who are explicitly required to invest in government debt.
      • Banks, non-banking financial companies, insurers, provident funds, and pension funds are all forced to invest in government debt as a condition for their licence to operate in India.
      • We also find that RBI works towards aiding the government borrowing programme rather effectively, ensuring that interest rates do not change too adversely.

    Conclusion

    The government should not be excessively worried about the government living beyond its means at this juncture. Government spending being the main driver for the country’s GDP growth, it could be a good way to put the economy on a higher growth trajectory. Perhaps it is time to revisit the entire FRBM framework.